Finance Committee

Meeting date: Wednesday, March 5, 2014

Official Report 519KB pdf

---

Revenue Scotland and Tax Powers Bill: Stage 1

Good morning and welcome to the seventh meeting in 2014 of the Finance Committee of the Scottish Parliament. I remind everyone present to turn off mobile phones or other electronic devices.

Our first item of business is to continue our stage 1 consideration of the Revenue Scotland and Tax Powers Bill. Today, we will take evidence from the Institute of Chartered Accountants of Scotland and the Chartered Institute of Taxation.

I welcome to the committee Elspeth Orcharton and Charlotte Barbour of ICAS, and John Whiting of the Chartered Institute of Taxation. I understand that there will be no opening statements because we have your fairly extensive written submissions, which all members will have read and digested and on which they are prepared to fire questions at you. As usual, I will start off with a few initial questions.

I will go straight to one of the nubs of our deliberations, which is the general anti-avoidance rule. Your papers are so detailed that I could spend the full 90 minutes going through the matter but, obviously, my committee colleagues will want to have their say, so I will not abuse my position in the chair.

On the rule, ICAS states that

“the Bill lacks balanced safeguards”;

and CIOT says that

“the use of the phrase ‘one of the main purposes’”

will result in

“a very low threshold for”

determining that a tax avoidance arrangement exists.

Your organisations provide advice to people on how they can reduce their tax bills, but surely the point of the bill is to do the opposite and ensure that people pay their fair share. We want to pass legislation that ensures that the population accepts that there is general fairness. There is real resentment in society that someone who earns 10 times as much as a nurse, bus driver or postman might, through use of certain tax legislation, pay a much smaller proportion of tax than people in those professions.

What would be the outcome of the changes that both organisations suggest to the bill, other than a reduced tax take for the state, which would mean fewer potholes getting fixed and less money in the national health service, for instance? How do your positions on the anti-avoidance rule create a balance whereby people pay what they should pay and, at the same time, pay a fair share?

I will start on that one.

You are absolutely right, convener, to state that our members give advice in practice but, as a body, we are deliberately constituted as a charity and exist to improve the tax legislation for the benefit of all involved with it. That means taxpayers and the authorities, as well as practitioners.

The aim of our comments on the bill—and the key thing that we want to achieve with any amendment to the rules—is to improve certainty. It is obviously completely up to the Parliament and revenue Scotland to decide how they wish to frame the legislation on a general anti-avoidance rule. As you well know, the United Kingdom has gone down the route of the general anti-abuse rule. However you do it, one of the things that people—we mainly have in mind businesses—will ask when they look at it is whether they know that, if they take a particular course of action, they will or will not be within the ambit of the provisions. The worry is that if that is uncertain, people might decide not to do something, which can damage business confidence.

The simple aim is to try to improve confidence and certainty so that people know where they are. A simple illustration that I always use to test out provisions is: what would I say to someone who told me that they were thinking of starting in business and wanted to know whether they should act as a sole trader, a partnership or a company? There are many commercial issues around decisions of how someone should operate, and those decisions also have tax consequences. If I was going to say to you, convener, that you should operate as a company because of certain circumstances or as a sole trader because of other circumstances, I would want to be sure that there would be no risk of the authorities saying under the general anti-avoidance rule, “There was a tax benefit in you going one route rather than another.” Therefore, I might have to advise you that I did not know whether you would be affected by the GAAR.

It is as simple as that. I am aiming for certainty in knowing where I am and where you as my client are, so that you know what the results will be.

I am keen to hear from ICAS on this important issue as well.

Surely the point of not having certainty—in tablets of stone, if you like—is that there is room for interpretation. The GAAR is not as wide as you have suggested. A couple of years ago, there was a famous case that every layperson would have said involved a deliberate attempt to avoid taxation. However, because the legislation was so specific, two thirds of the judges who looked at the case decided that the letter of the law had been followed, even though its spirit clearly had not been.

There is an issue about having tax law that is so clearly defined that it is easy to get around. Having less certainty to a degree allows interpretation based on what is intended, instead of just what is absolutely stated in the wording in a piece of legislation.

That is a fair point. We have great concerns about the way in which detailed anti-avoidance legislation is being piled on more and more. You are absolutely right that what you have suggested is sometimes the case. I do not know the exact case that you are thinking of, but disguised remuneration legislation is sometimes cited as a good example of something that exists to police things such as employee benefit trusts, which I know is a sensitive issue in Scotland. However, the problem with the legislation is that it has become so detailed that people start to look for loopholes in it and you end up with exactly the sort of problem that you allude to.

There is considerable merit in taking more of a look at the bill’s principles, which should, after all, express what it aims to do, and they should be coupled with good guidance to make it clear what the bill really means. As we say in our paper, that might be termed “dynamic guidance”—in other words, guidance that is kept up to date in the light of experience and is not allowed just to lie down and grow whiskers.

That would help people know where they were; would give them certainty; and would help them know what the legislation was aiming at and what it was trying to prevent them from doing. They would know not only that it was trying to prevent them from avoiding tax in a certain way, but that they would not be tripped up if they went down what to them was a perfectly good commercial route for good commercial reasons.

I had better let ICAS speak.

Thank you. What with the press and media coverage in recent years, sometimes in relation to the case that the convener alluded to—which I thought was a slightly different case; it was not about EBTs—the general expectation has become, in a phrase that I have heard used, “Everybody’s at it.”

Like the vast majority of our members, I have spent the vast majority of my time in professional practice—I think that it is 25 years now; I have stopped counting—explaining to clients what the law is and what the answers are with regard to the specific transactions that they wish to make. We are not seeking to keep open any particular route to tax avoidance, but we are aiming to get to a position in which there is certainty in transactions.

That is why we want to look further at the current draft of the GAAR. ICAS has a committee of members from a significant commercial and business background who are examining the position with regard to Scottish taxes. Generally, their concerns are that, if more certainty is not given, businesses that are looking at property development or transactions or which are considering an investment might, in the absence of certainty, take their business south of the border rather than invest in Scotland. There is room to improve on the certainty aspect.

On safeguards, we are concerned about the extent to which revenue Scotland, which is as yet an unestablished and unstaffed body, appears to have almost a delegated right to decide whether a transaction—to use the wording of one of the tests—lacks “commercial substance.” As revenue Scotland would write the guidance that tribunals would have to take into account, it would to a certain extent have the right to say exactly what was and what was not commercial, despite the fact that the staff—with all due respect for their technical expertise—would not have a commercial background. We want balanced safeguards to ensure that, if there is a test for commercial substance, people with commercial experience will be involved in the decision-making process.

It might be helpful for the committee to know that earlier this week we met the Scottish Government bill team, and I would like to hope that the door is open for us to go back with some constructive suggestions about what might be possible with regard to adding further definitions to the GAAR or, alternatively, looking at a clearance process that might help to deal with the fear of a lack of certainty without necessarily giving rise to the kinds of misplaced concerns that Kenneth Gibson expressed that the measures are all about the tax avoidance industry.

Revenue Scotland’s role is to optimise rather than maximise tax revenue and to ensure fairness across the board.

At paragraph 23 of your submission you state that

“‘Reasonableness’ ... has been criticised as being too subjective”

and that

“the Bill lacks balanced safeguards”,

which I assume means for taxpayers, or a proportion of them.

Incidentally, on page 36, you mention “scheme promoters”. What is a scheme promoter?

I am sorry—I do not have the page numbers in front of me.

I am sorry—I was talking about paragraph, not page, 36, which mentions

“disclosure obligations on taxpayers and scheme promoters”.

What is a scheme promoter?

Paragraph 36 addresses the question whether there would be an equivalent of the HM Revenue and Customs provisions for the disclosure of tax avoidance schemes. That separate regime requires what UK law defines as “scheme promoters”—those who suggest or recommend avoidance arrangements—to make formal disclosures of that activity to HMRC. I understand from recent discussions with the Scottish Government that Scotland is not going down that route.

Okay. I have a question first for ICAS and then for CIOT.

On revenue Scotland’s investigatory powers, ICAS suggests that the comment in the Government’s policy memorandum to the bill that to extend protection beyond the legal profession would

“unduly hinder efforts to tackle tax avoidance in Scotland”

is

“unsubstantiated, misplaced and anti-competitive.”

How much avoidance is there, and how would extending the protection “unduly hinder” such efforts?

10:15

That was a deliberate quote from the Scottish Government’s policy memorandum. Those claims are unsubstantiated, simply because we have not seen any evidence that, within the remit of giving tax advice, the non-legal profession on its own is the great promoter of tax avoidance in Scotland.

On your question about hindering efforts to tackle tax avoidance in Scotland, I should make it clear that, on a daily basis, most of our members help people to meet their tax obligations. Generally, people seek tax advice because they want to comply; because they do not understand the rules or necessarily come into contact with those rules on a regular basis; and because they do not have the time to develop the expertise and are not comfortable about doing so. As a result, they go and ask someone who knows the answers to their questions.

In providing advice to those individuals, assisting them with their filing obligations and reminding them of their payment and legal obligations, tax advisers such as the members of ICAS and CIOT are governed by a professional code of conduct that covers legal and ethical issues. Most of what they do has nothing to do with tax avoidance; instead, they are mostly answering the question, “What tax liability am I going to pay?”

That is a good point, and it is important for the committee to hear. I do not want to overegg the pudding with regard to GAAR, but in considering the legislation we are looking at the margins and where changes could and should be made. I think that everyone accepts that what you have described is the basis of what your membership does.

Mr Whiting, your organisation expresses concerns about client confidentiality, which is a real issue. In your submission you state that

“a tax advisor may have no formal qualification and not be subject to professional regulation but those who are members of one of the accountancy institutes or the CIOT are qualified and regulated.”

Do you think that extending protection beyond the legal profession is in the public interest? If so, can you explain why?

Our basic point is that, at present, there is not a level playing field. We are arguing that it is in the public interest—and in the interests of revenue Scotland and the Parliament—that people who want tax advice are free to go where they wish and to get the best advice that they can.

I associate myself wholly with Elspeth Orcharton’s comments about why people seek tax advice; they do so for all the reasons that she mentioned, including the fact that, frankly, they have better things to do. You and I could do plumbing, but I have no doubt that we choose not to do so because we would rather do other things. For those reasons it is in everybody’s interest that, if somebody wants tax advice, they are in a position to go to the best—so there needs to be a level playing field—and to people who are well qualified to give that tax advice.

At present, the way in which privilege operates means that there is a certain amount of additional protection in certain circumstances, particularly for advice that is given by lawyers. Does that hinder people who are seeking the right advice? In some circumstances—as we mention in our submission—it might push somebody to take advice from a lawyer because they know that the advice that they are getting can never be disclosed to revenue Scotland or to anybody else.

Does that get us to the right position? I am not sure that it does. Are we arguing that privilege ought to be extended to everyone? No, we are not. We are trying to highlight the fact that there is an unlevel playing field and that it is in everybody’s interests that, in the same way as if they want an expert plumber, if people want tax advice they should get somebody who is properly qualified and regulated. We therefore think that, if there is an argument for some form of privilege, it should attach to certain circumstances and to anyone who is properly qualified and who gives advice in that area.

Some of the tax advisers are not qualified, as you accept in your submission.

Yes, and in many ways that is quite a concern. The statistics show that approximately 30 per cent of those who act as advisers do not have a professional qualification or have a qualification that is not of as high standing, if I can put it that way, as ICAS or the Chartered Institute of Taxation. We subscribe to professional rules, practice guidelines, professional conduct in relation to tax and disciplinary boards, and, if we are in practice, we have to have professional indemnity insurance. That is all the paraphernalia that one could expect of a good professional.

That is a continuing issue. I do not have an obvious solution to it, but we have to flag it up. All we can do is make sure that our members are properly trained, kept up to date, subject to a proper code and disciplined if they do not conform to the proper way of operating.

How often are people disciplined?

I do not think that I have one in my bag, but our monthly magazine Tax Adviser reports the results of the independent taxation disciplinary board, and I am not proud to say that cases are always being reported. I am also a member of the Institute of Chartered Accountants in England and Wales, and it has about four pages on the issue in most of its monthly magazines. I am not sure whether ICAS has people being disciplined; I am sure that it does. We are not proud of it, other than of the fact that it shows that we discipline those who fall short of standards.

I am going to let in my colleagues in a wee minute, but Charlotte Barbour wants to say something.

I was just going to comment on ICAS’s regulatory regimes because I worked with them for a while. All our members who are in practice need practising certificates. Monitors go out, check the way that practices are conducted and report back regularly to the practising certificate committee. Like John Whiting, I do not want to say that lots of people are being disciplined, but there is a strong regulatory regime around all the activities of our members in practice. It is a well-regulated and well-functioning system.

I have one final point on extending privilege. It would obviously benefit the accountancy profession as it does the legal profession, but how does it benefit the public? Is it just by widening choice? What are the benefits to the taxation system?

The answer to that probably sits in widening the choice. When I last appeared before the committee, I mentioned that that has not historically been a great issue for the accountancy profession or for ICAS members, but it has gained prominence recently in two situations.

I think that the committee has heard about the first one before. It was a Supreme Court case that involved Prudential, which was the name under which it was listed. The Supreme Court judges opined that the law did not require to be addressed in terms of the imbalance that means that only lawyers can have legal privilege on tax matters. However, in the UK, the bulk of tax advice is given by people who are not qualified lawyers, namely the accountancy profession or tax professionals as members of John Whiting’s institute.

The second area in which the issue has come much more to the fore is the extent to which legal firms, particularly from London, are advertising in publicity and marketing material the fact of confidentiality of legal privilege as a reason why anyone seeking advice would want to go to them rather than elsewhere. I do not remember that being a feature a few years ago, but it is the kind of issue that we would not necessarily want games to be played with.

A straightforward method of addressing the issue might be to follow our suggestion—which is, of course, not the only solution—to go the way of the rest of the United Kingdom by having particular information powers at an early stage of an inquiry to keep the playing field level.

I completely agree with Elspeth Orcharton. Some out-and-out avoidance schemes have been devised by lawyers under the cloak of privilege, and they have tried to resist disclosure of papers to the tax authorities by sheltering behind that privilege. That is a risk, but I simply want to point out how the system might not be operating in the right way. We feel that the answer is to level the playing field, coupled with a certain amount of education about the value of going to a properly qualified adviser if people want proper advice.

Thank you. I will now open out the session to colleagues.

I want to stick with this particular issue, because I think that it is important. Indeed, Mr Whiting’s last response demonstrates why it is important for us to get all this right.

Elspeth Orcharton has kind of answered this question already but I will ask it: on a practical level, how big is the issue? You have already said that, historically, it has not been a big issue for the profession, but the question is whether it actually harms accountancy firms. Are they struggling because of it? As has been pointed out, the vast bulk of tax advice is still given not by lawyers but by other professionals.

Someone might say that they have never seen a starving accountant, but that is not the point that we are making. At the moment, the provision of coherent tax advice, which sits primarily within the accountancy profession, can be interrupted, and if you are looking for people to make their fair contribution—and to understand what that actually is—you do not really want that conversation with an accountant to be interrupted by some lawyer jumping up and down, saying, “You should come to us to discuss this issue, because it’s slightly different.”

Although at the moment it is not a massive issue for most of our members, it is increasingly becoming one. This conversation and its timing have been occasioned by the introduction of this bill in the light of other case law that has come up. We believe that this is a matter for Parliament; indeed, the Supreme Court has said as much to the Scottish Parliament and Westminster, and that is why it is on the agenda.

I think—one of my colleagues will correct me if I am wrong—that, when we spoke to the bill team last week, it made it pretty clear that the privilege that lawyers have is not wide ranging but pretty tightly defined. It also suggested that it might go away and reflect on the evidence that we gather at stage 1 and that, if it felt that privilege needed an even tighter definition, it would put that in place. Do you welcome that?

Going back to Mr Whiting’s comment that lawyers have used privilege as a guise to devise avoidance schemes, I have to say that my understanding is that that is not what this power of privilege—for want of a better term—is there for. Would you welcome a tighter definition of privilege?

Yes. Indeed, that is very much what we want. The Prudential case that we were involved in and which Elspeth Orcharton has already alluded to supports the argument in that respect. Our objective is for the issue to be looked at properly, and we believe that the Parliaments here, at Westminster or in both places need to examine the issue and tell us what they want privilege to apply to.

My own belief is that privilege stems from a time when only lawyers could speak on behalf of those accused of crimes and it was required to protect the accused’s communications with their lawyer, who, in effect, was speaking their words. If that is where privilege came from, I am not entirely sure what it is doing regulating how tax advice is given. That is what makes me feel that the whole area needs to be looked at to determine what should be privileged.

10:30

I keep coming back to the idea that, in certain circumstances, privilege should apply no matter who is giving the advice because it is in everyone’s interests that people get proper advice. I point to a situation in which somebody gets very behind, is seriously in arrears and has serious problems with their tax affairs. It is in everybody’s interests that they make a complete clean breast of it to their adviser, who will then help them to get up to date and regularise their position. We might say that we want no worries about disclosure of what is said in those circumstances, and obviously the good professional will use the information that is given properly. It is in such situations that we might want privilege to apply because we want everybody to feel able to give proper advice and to get the person up to date.

Okay. We will probably look at that issue a bit further.

Mr Whiting, your organisation has set out concerns about some matters being left to secondary legislation, arguing that some rules should be part of the primary legislation. However, it is a more arduous process to amend primary legislation, and secondary legislation is still subject to parliamentary scrutiny, so I am not clear what your concern is.

It is one of those questions of balance. As a matter of principle, we always prefer rules about tax to be in primary legislation. At the same time, we freely accept that we can never put everything in primary legislation and that we are going to have secondary legislation, particularly about administrative matters, and guidance. However carefully legislation is written—the bill team has done a very good job in writing clear legislation—we will always want a certain amount of guidance to help people to know what the law is. We might therefore say that there will be three levels.

Our concern is that the real rules should be in primary legislation and, in that respect, we home in on certain aspects of the penalty provisions. Penalties are a key part of legislation, and taxpayers should know when they are going to be penalised. I fully accept your point that secondary legislation is still subject to parliamentary scrutiny, but we think that something as key as the penalties that will apply should be in the primary legislation. Secondary legislation can cover how the penalties will be applied mechanically, but the circumstances of the penalties should be in primary legislation together with the welcome powers on how they can be mitigated and when they can be suspended. That area of the penalty regime is pretty fundamental to the fairness of the tax system, and we would have thought that the Parliament would want to be sure that it is being fair.

Why would taxpayers not know where they stand in relation to penalties just because they are in secondary legislation? I do not see why people would not know that. To be perfectly frank with you, I would imagine that most people out there do not know the difference between primary and secondary legislation.

That is a fair challenge. You might take it a stage further and ask whether they would mind if it was just in guidance. It is a matter of principle: I accept your practical point that, at the end of the day, the taxpayer does not know whether something is in primary legislation, in secondary legislation or in guidance, but I feel strongly that something as key as this should be in primary legislation.

I think that Charlotte Barbour wants to comment.

I and ICAS members feel strongly and have long said that principles should be in primary legislation. One of the difficulties with tax legislation is that a lot of it is very detailed. We tend to think, “Detail? Secondary legislation—pop it in the regulations”, whereas an awful lot of what we are working with is the detail, and the detail constitutes powers.

I believe that principles should be in primary legislation, and the powers are the principles. What revenue Scotland will be able to do on levies, penalties and interest are powers and they should be up at the top. In particular, the penalties are for promoting and enforcing compliance in a self-assessment system, and so the penalties are the main tool. In any appeals system, people who are hit by penalties usually come back to the question whether or not they are fair.

That brings us back to your points about fairness, convener. I believe that, in order that those who have implemented the legislation can say, hand on heart, that the system is fair and that they have actively considered it and put it in place to encourage compliance in such a way that the onus is on the taxpayer to do things themselves, those provisions should sit up among the main principles in the primary legislation.

Whether they are in secondary or primary legislation, they will still have effect in law. I am hearing you all talking about the high principle, but I am not getting a sense of why it is such a high principle.

With regard to how you structure legislation, primary legislation—the first port of call—should say what powers are being awarded. Awarding a penalty to a taxpayer means giving revenue Scotland a power. The details of that are therefore really important: the amount, when and why. That should all be put in the proposed legislation, at the top. It is really important that Parliament considers that.

I ought to declare an interest, as I sit on the first-tier tax tribunal. We hear lots of cases about penalties, and nine times out of 10 the questions concern the fairness of the penalties. That is not for the tribunal, the taxpayer or revenue Scotland to decide; it sits with why the penalties have been legislated for. I accept that secondary legislation comes before Parliament, but I do not think that it is as actively discussed and deliberated on as part of the full package of how you are forcing your citizens to comply.

That depends on what committee the measures go before—it is up to the committee to consider them rigorously.

I have a question for the Chartered Institute of Taxation. In relation to the charter in the bill, you noted the contrast between what revenue Scotland should aspire to and what is expected of the taxpayer. That was raised with the bill team and, to be fair to them, they accepted that the provisions could be better framed. What was the institute’s concern? There is an offer from the bill team to consider those provisions and perhaps word them better. How could they be worded better?

That is very welcome news—I am aware that the bill team is going to have a think about it.

We are great fans of charters. We have been involved in a project that has been taking place around the world to develop model charters. We view them as very good demonstrations to ordinary taxpayers of how the tax authority will work and what responsibilities there are. It is all part of building confidence in the tax system.

At the same time, the charter is a good means of communicating to taxpayers how the whole thing will operate. It is very much a two-way street, with rights and obligations on both sides. To have confidence in the charter and to make maximum use of it, it must be seen to say what the tax authority is expected to do. We were keen for the charter to outline the expectations on both sides.

The charter should regularly be reported on, with an obligation for revenue Scotland—probably signed off by the members of revenue Scotland—to lay a report before the Parliament on how the charter is going. There should be observations on how the tax authority is operating and how taxpayers are responding to it.

I take it from that therefore that there should be some sort of equivalence in terms of the standards for the tax authority on one hand and those for taxpayers on the other.

Yes. The system involves rights and obligations on both sides, and the charter is a good way to communicate that.

Returning to your previous questioning, I think that taxpayers will not look at legislation, be it primary or secondary, whereas ideally a charter can be communicated in a poster or in a pretty brief document. It can be part of a statement of how the tax authority is going to treat people and, at the same time, what it expects from people: taxpayers are supposed to do this, and in return the tax authority will do that. That is a pretty powerful means of building a good rapport between taxpayers and tax authorities and of ensuring that everybody has confidence in how the system will operate.

I take that point, which is well made.

I was going to ask about the charter, but that has been substantially covered by the previous series of questions and answers. To be fair to the bill team, it has indicated movement on consultation, which was a concern, and on the language of aspiration. I agree with everything that John Whiting said in his previous comment and I hope that those changes will be made, which would help to give the public confidence about revenue Scotland.

One of your concerns about the GAAR is that revenue Scotland’s position is not quite right—perhaps it is being given too much discretion and too much will depend on what it decides is reasonable. I will ask mainly about that. Some of your evidence on that is a little persuasive. In the past few weeks, various people have mocked the double reasonableness test but, when I read your submissions, I came to think that the double reasonableness test is quite reasonable. The essence of the test is an attempt to take an objective view of what is reasonable. The fear is that, otherwise, what is reasonable will be just what revenue Scotland decides.

Does the approach work in England? How does the advisory panel work in practice? That is the essence of achieving objectivity.

I make it clear that the advisory panel has not formally pronounced on the UK general anti-abuse rule—as far as I know, no cases have gone before it. However, in principle, the intention is to ensure that—as you put it well—reasonableness is judged reasonably, to keep peddling that word.

The view should be not just that of HM Revenue and Customs or revenue Scotland but that of a group of reasonable people. The aim of having the advisory panel is to bring in commercial common sense. That does not override the rights of revenue Scotland or HM Revenue and Customs to run the tax system properly and police the avoidance that the convener referred to; the aim is just to ensure that the view fits in with commercial reality.

As John Whiting said, the advisory panel has not judged a case, but it has had a role in reviewing the guidance that was issued on the operation of the UK general anti-abuse rule. That guidance was universally welcomed by practitioners, because it described succinctly what the rule is intended to do—it is game changing, to use that expression. The guidance also went into detailed worked examples to show why the law would be considered to apply in particular circumstances. That law applies to a range of taxes and not just to the two currently devolved taxes, as in Scotland.

The advisory panel objectively reviewed that guidance. We would support having such guidance in Scotland. It does not say just what does and does not work; it explains in the context of the legislation and the legislative principles why something is or is not acceptable. That is an additional role for the panel.

I was going to ask about the guidance. The bill says that the courts must take into account non-statutory guidance, which revenue Scotland could issue. You have suggested one way of dealing with concern about that—having oversight of the guidance—but is there another way of doing that? Is it accepted that such guidance is required? Should some of it be in legislation of one form or another? Is there another way of ensuring a check on the guidance?

10:45

The question to be answered with respect to the provision as it is drafted is: what will make the guidance both workable for practitioners and succinct and clear in terms of revenue Scotland fulfilling its obligations? I alluded earlier to the test on whether a transaction lacked commercial substance or otherwise, or whether it was artificial or otherwise. The model seems to be—so far—working for the rest of the UK, partly because it is deterring people from the kind of behaviours that the tax authorities want people to steer clear of. The model seems to be a good one on which to proceed, and it should be seriously considered.

It all comes back almost to where the convener started. The guidance, in common with the GAAR, should send clear signals that abusive tax avoidance will just not be tolerated and will not work.

The point of an advisory panel, or something else, looking at the guidance is to ensure that the message goes out in a proper, balanced way. What could operate as well as an advisory panel? As much as anything, that probably comes down to our favourite topic of consultation. Even if an advisory panel is not formally constituted, the guidance should go through bodies such as ours so that we have an opportunity to comment and say, “We can see what you’re getting at but it won’t be read quite like that in practice. To get over the message that you want to communicate, it would be better if it were worded in this way.”

One of your concerns that I am not quite so sure about is whether the bill should refer to

“one of the main purposes”

or just to “the main purpose”. I do not see the problem, as

“one of the main purposes”

is still a main purpose. I am not sure why the fact that there may be other main purposes should make much difference.

Our point is that we would prefer the phraseology “sole or main purpose” to be used in reference to tax avoidance. That is our objective. We can accept the way in which the provision has been framed but, at the risk of sounding like the proverbial stuck record, we want to be sure that people going into normal commercial transactions are clear about whether they are caught by the provision.

Earlier, I used the example of incorporation. If I advise someone on incorporation, one of the purposes of the advice is to enable them to take into account tax considerations. I would not be doing my job if I did not explain that aspect to them. Giving someone advice on incorporation is, therefore, immediately within the ambit of the provision, whereas nobody would say that the sole or main purpose of advice on incorporation is tax avoidance.

It is a matter of terminology. We accept that

“one of the main purposes”

is where we are; we are just trying to ensure that there is proper balance to achieve the certainty that we think is important.

I have one final question about another area. Different views seem to have been expressed, over the past week or two, about the extent to which the bill will be fit for purpose in the context of a greatly expanded range of tax powers, whether they come through enhanced devolution or independence. Is the bill geared simply to the limited tax powers that are in the pipeline, or will it be fit for purpose in the context of that wider range of tax powers?

My view is that the bill does what it set out to do, which is to provide everything that is needed for the currently devolved taxes to be brought into play, but that it does not cover every circumstance that will be possible in the future. It covers the landfill tax and the land and buildings transaction tax, which are essentially one-off transaction taxes. However, income tax powers work on an annualised system of annual income, offsets and different things. A number of powers would probably need to be introduced simply to deal with annualised taxes as opposed to transaction taxes.

However, that is not a failing. Our concern, back at the start of the process, was that a bill could be devised to deal with absolutely everything and to detract attention. We feel that there is quite enough to focus on in the bill as it stands and that it is far better to focus on a really good-quality bill with one eye to the future than to try to cover everything at the same time, particularly when those further tax powers have not been designed or determined.

I am possibly a little more optimistic than Elspeth Orcharton. The bill does a very good job of putting in place a framework for revenue Scotland—let us not forget that it establishes that body—for powers that will apply in most circumstances and for the tribunals. The bill has a terrific amount in it and, as I have said, the bill team deserves great credit for what it has covered in the bill.

I do not think that the bill takes into account or caters for absolutely everything that could happen on devolution in any shape or independence and I do not think that anybody could ever imagine it. There are reports in the papers today about a possible sugar tax. If the Parliament decided to introduce a sugar tax, would the bill cover it? The framework is there, but you would almost want to be sure that it did. As Elspeth Orcharton said, if Scotland takes full powers over income tax, we would want to test whether the bill would cover everything that you would want.

As a framework that gets you most of the way, the bill does a good job.

The next rumour will be that we will introduce a tax on the air that we breathe.

I should probably declare an interest in that I am a member of ICAS, which means that I have to cross-examine the ICAS witnesses with more rigour.

Be careful of the disciplinary process, Mr Mason.

Yes, well I might touch on that later, but we will see how we get on. We have covered a wide range of areas. I will go back over a few and question a few points that have been raised.

I start with privilege for the legal profession as against the other professions. I totally agree with the idea that there should be a level playing field. If we are in the position in which lawyers have a bit more privilege and accountants and tax advisers have a bit less, the question is whether we bring everybody else up and give them more privilege or bring the lawyers down and give them less and, perhaps, define it. I would prefer the latter approach. Do the witnesses have particular views? Should there be more privilege for everybody?

We are looking at the powers in relation to certain information notices only. We are talking about accountants and tax advisers coming up in a fairly contained area. The area simply supports open discussions when clients come in and, particularly, something has gone wrong so that there are enough safeguards on what the advisers have to do on that.

I suspect that lawyers apply legal privilege to things other than tax advice that do not cause a particular concern, but we are considering tax, so it is a lifting up but in a fairly defined and narrow area.

To use your analogy, Mr Mason, we would envisage the lawyers coming down and qualified tax advisers going up. I do not know whether they would meet halfway, but it would be a movement on both sides. Of course, some of the CIOT’s members are lawyers and they end up in slightly strange positions.

When they are giving different advice.

I think that the bill team said that it was considering the matter.

If someone comes along with their affairs in a bit of a mess—perhaps they have just not done their tax return in a while—and they are going to be open with their adviser about that, there seems to be an assumption that they should not be open with revenue Scotland about it. I am a bit concerned about that. We have had a very confrontational approach in the past between HMRC and taxpayers. Would it be possible to have more of a partnership approach in which the adviser or the taxpayer goes to revenue Scotland, admits that they have made a mess, provides all the information and asks whether they can come to a reasonable agreement?

Yes. I think that that is what we would all promote.

That is an excellent road for going forward. We would hope that that would always be our starting point. I would be very supportive of the mediation facilities that are proposed in the bill. Anything that helps to fix things must be good. I do not think that privilege is necessarily used to cover up anything; I think that it is used to help get the best compliance. We know ourselves that if we have blotted our copybook, we might not be sure how to proceed. We might want to have a private discussion about it, then be assisted in addressing the matter properly. As was suggested, our accountants are mainly fairly conservative professionals who are there to help and make the system work.

Right—although we have one or two accountants who have not been quite so conservative.

The power that we are looking at in the bill relates only to investigations. The vast majority of cases, as was described, involve someone who has not filled in their tax return and has gone to their accountants. The expectation is that the full work would be done, full disclosure would be made to HMRC and all taxes would be paid and settled. However, I think that the power is about cases in which a different view might be taken by the tax authority, and that happens in a very small percentage of cases. There are occasions when HMRC takes a particularly aggressive approach and wants copies of absolutely everything but not necessarily at the right time for disclosure to be made. In addition, HMRC might make allegations or go beyond what is necessary for full disclosure and settlement, and for regularisation of tax affairs to take place.

I would therefore not want everyone to think that it is a day-to-day occurrence for accountants to put their head in their hands and say, “Oh, I don’t have privilege.” In a big percentage of cases, privilege does not apply. However, where it applies, it is pretty relevant.

Presumably, that is where the charter might come in. The attitude of revenue Scotland could be covered in there, as well as the need for it to be as rigorous with big taxpayers as with small taxpayers; sometimes that has not been the case in the past.

That is a very good point.

The word “reasonable” has been mentioned. You got some sympathy on that from Malcolm Chisholm, so I will give you a different view. I still maintain that using the word “reasonable” twice in the same sentence is bad English. We could just keep adding the word “reasonable”; I came up with a sentence that used the word three times. A wording has been suggested along the lines of, “The arrangement cannot reasonably be regarded as a reasonable course of action”, but that still does not say who will have the regard. I would add to that wording, “a reasonable person cannot reasonably regard as a reasonable course of action.” That would give us the word “reasonable” three times, which presumably would be even better.

Someone—I cannot remember who—referred to bringing in commercial common sense. However, that approach would worry me. Would it mean that we were swinging the balance towards commercial interests or the taxpayer and away from the beneficiary of the tax—that is, the citizen? Do the witnesses have any thoughts on that?

The concern with the use of the word “reasonable” is around who is being reasonable and whose judgment it is. If you want a fourth use of the word “reasonable” for your example, you could add the phrase “at a reasonable time of day.” I am being facetious, but the serious point is that we would all come to a slightly different view of what is reasonable at different times and in different circumstances.

In all honesty, I do not think that one can get away from the use of “reasonable”. It is a well-used term in cases. One of its prime uses is with penalties and whether a taxpayer has a reasonable excuse, so it comes up a great deal. The concern is that it is a rather flexible term, whose meaning can change according to circumstances.

We probably need to establish some guidance or track record on how the term will be used. If we can constrain, rather than expand, the number of occasions on which it is used, that will contribute to certainty for the individual taxpayer or business taxpayer. It will also translate to a little more certainty about how much tax will be raised by the revenue authority through the power, so the recipient will know a little more surely when they are going to see the money.

11:00

Do you accept that, as the convener pointed out, the more we pin such things down, the more we move away from principles and back to the detailed rules and regulations that we are trying to escape from?

I quite accept the danger of going down the path of endless details, but it is a question of striking a balance between those endless details, which none of us wants, and the legendary one-section act that some people say the UK tax code could be reduced to, which is basically that the taxpayer shall be left with such proportion of his, her or its income as HM Revenue and Customs in its infinite discretion shall reasonably decide. [Laughter.] I should say that I am a non-executive director of HM Revenue and Customs and that I do not support such a proposition.

To be fair, most of us probably do not.

On what the word “reasonable” means, if I understand it correctly, the double reasonable condition in England has not yet been tested in court, so any words that we use—including the word “reasonable”, although it has been used in court in other areas—will move us on to new ground anyway. Presumably, therefore, if revenue Scotland were to abuse its position and be unreasonable, that would soon be challenged in court.

Potentially, yes. I am sure that revenue Scotland does not plan to set out to be unreasonable. Without trying to do Charlotte Barbour out of a job, we do not want endless cases coming to the tribunal, so it is about giving some reasonable guidance.

I completely understand the slight frustration about the use of the word “reasonable”. I have failed to come up with a different word, so I cannot criticise from that perspective, but context is the way in which one applies what is reasonable, and context is what we are looking for. It could be given in guidance, by a separate panel or by moves towards objectivity rather than subjectivity and uncertainty.

You said that you reckoned that most taxpayers want to comply, and ICAS’s submission refers to the expectation of revenue Scotland

“Treating the taxpayer as honest (unless there is a good reason not to).”

I suppose that I start with a slightly more sceptical approach, because there are a lot of people out there who want to pay as little tax as they possibly can, especially if they are writing a cheque for it, and self-employed people have more freedom than employed people, I guess. Do you stand by your claim that everybody is honest to start with?

Two different things apply. My experience is that most people whom I have come across want to comply, and that means that they want to act within the law and in a lawful fashion. That can sit alongside not wanting to pay the maximum amount of tax possible. Those people want to pay the minimum amount of tax possible within the law.

There are statistics on the scale of the black economy—those who operate outwith the law and do not comply with their obligations. I am not sure that anyone has ever measured it accurately, but it is still expected to involve a minority rather than a majority of the UK population. The interesting question is about the extent to which fairness is a spectrum. If you ask a room full of people how many of them would like to pay less tax, most people will put their hand up. If you give people two legal alternatives and ask who would like to take the alternative in which they paid less tax rather than more tax, most people would say that they want to pay less tax rather than more, but within a framework of complying and doing it legally.

I do not think that we will ever get away from that, or that we should necessarily try to get away from it. However, we try to ensure that the boundaries on what is legal and what is not legal are as clear and certain as possible, so that we can go back to people and say that they were definitely on the wrong side or on the right side.

The wording in our submission was intended to stimulate debate. Quite a few of the suggestions come from other charters that are around. John Whiting alluded to some international charters. We wanted to get a flavour of the Parliament’s thoughts on what should be in the charter. Are those reasonable—sorry, there is that word again. Are they appropriate comments or expectations? If Parliament can set the tone and the direction, it is a lot easier for professional bodies and our members to understand what you are aiming at. Also, it is about the direction that you give revenue Scotland.

The vast majority of people in this country want to pay their taxes and move on—they have better things to do—and therefore they want to comply. To put the issue into context, the UK generally is a pretty compliant country. About 93 or 93.5 per cent of our taxes just come in, and HMRC gathers a little more on top of that. That means that our tax gap is famously about 7 per cent, compared to about 13 per cent in the US and 8 or 9 per cent in Germany. We are a pretty compliant nation. Although I am not in any sense saying that we have not got a problem, let us keep it in proportion.

That is fair comment, although I sometimes wonder how such figures are measured.

I turn to the final area that I want to touch on. Ms Orcharton suggested that, if there was more certainty in England and less in Scotland, businesses would move there. However, I suppose that that depends a bit on the type of business. Businesses such as Tesco or Starbucks want to be everywhere and extract money from the population wherever they are. From their point of view, if the tax situation was slightly less favourable in Scotland or Holland—or anywhere else, for that matter—that would not prevent them from going there, and it would not mean that they would concentrate only in England. I presume that they would just have to deal with it. However, I presume that, if a business such as Barclays is thinking of staying in England or moving to Scotland, the comparison becomes more relevant. Is that the case?

The discussion that took place in our office was in the context of the land and buildings transaction tax, which is the imminent one that we face, and locational decisions by those who might invest in a portfolio. The issue is not the absolute cost of the tax; it is the uncertainty as to whether the tax applies. If a business knows that something will definitely cost X, it will price that into its commercial decisions on deals and might pay less for a piece of land because it has more tax to pay. The issue relates to the impact of the uncertainty over whether businesses will have to pay tax. While that period of uncertainty exists, they might think that they cannot be bothered and will just concentrate elsewhere. That was the context in which our discussion took place—it was more about dealing with uncertainty rather than the absolute cost.

From my experience as a long-time tax practitioner, when businesses or wealthy individuals are making decisions as to where to locate, tax is one of the issues, but it is only one of the issues, and there are plenty of others. Tax can tip the balance, but it is rarely the deciding factor, except when people are, frankly, trying to out and out evade tax. Obviously, on evasion, we are into a completely different area.

Obviously, tax is a factor. Some people go to the Isle of Man or the Channel Islands because the tax position is certain—they will pay less tax—but not everybody does that.

Indeed. For a period, I was involved with location studies and helping businesses to decide where to invest. As I said, tax is one factor, but so are things such as communications infrastructure, transport infrastructure, language, time zone and availability of grants—you can tick them off as well as I can. All those are put into the mix and weighed up.

Tax is a factor, and very often—particularly in relation to headline rates of tax—it can get on to the shortlist for the individual or company to consider. More detail is then considered and we will see the likely result at the end of the day. If the result is that people do not know how much tax they will pay in a country or if they think that they will be subject to the vagaries of a rapidly changing tax system, that will tend to put investors off the country. However, there is a range of factors.

I do not know how rapidly changing many tax systems are, but there is a real issue to do with organisations—Starbucks has been mentioned—paying tax in the country where they make money as opposed to looking at countries such as Ireland or Luxembourg, where they choose to pay the lowest tax for their entire European or worldwide operations. That issue is separate from the one that John Mason raised.

It is. I am sure that you are aware that the Organisation for Economic Co-operation and Development is seriously worried about that.

On how frequently tax systems change, I am aware that Brazil is legendary for being the country in which it takes longest for people to do their tax. Basically, that is because its tax system changes every day. The Parliament is very productive, but I suggest that that is not an example that you should emulate.

That would keep some of your Brazilian colleagues in work, though.

Indeed.

A couple of my questions have been answered, one of which was about the bill being fit for purpose, given the constitutional change in the country.

I want to follow up on the heartening information that most people pay their tax, although people want to know that they are being fairly taxed and are paying their due. Does that not reflect the earlier concern about primary legislation dealing with the tax that is to be paid and the default position of secondary legislation dealing with tax evasion and avoidance penalties? The penalties are not spelled out. It seems to me that, if this is a positive piece of legislation and we agree that most people want to be fair and to be treated fairly, that should be reflected in primary legislation.

The view that we took and which our members express to us is that the bill is fairly historic. This is the first time that the proposals have come to the Scottish Parliament, and our members have many aspirations and expectations that the bill should be as comprehensive as possible, set out a coherent picture, and tell people what is expected of them and what will happen to them if they do not comply. That is where the point about having penalties at the same level of detail as applies to obligations comes in.

As has been said, the bill has to do all those things. It should raise revenue, give certainty, say very clearly what will happen to those who do not comply and fall foul of it, and be fit for purpose. I think that everything sits together in the same place.

Yes. Some 93 per cent or whatever pay partly because of sheer confidence in the system. It is well run by HMRC and Parliament and is not subject to whim or the Brazilian style of constant change. That creates confidence in the system, and that is an important message that the Parliament needs to send.

I have another question about reporting to Parliament. I think that you have concerns about that, although I cannot find the page in question. How do you envisage the system working? Who should do the reporting?

We were slightly unsure about exactly what the reporting structures were from the bill. I know that it says that a report will be laid, but there is no provision for accounts or actively reporting to Parliament. We have had subsequent discussions with the bill team in which it explained the finer nuances of how the chief executive will report to the board and how the board will be the office-holder.

We just wondered whether the bill or the supporting material need to be slightly clearer so that people know exactly how the board is to conduct its business.

11:15

Paragraph 8(2) of schedule 1 to the bill says:

“The person employed as chief executive may not be a member of Revenue Scotland.”

Are there advantages to that approach?

I will, if I may, reiterate something that I mentioned in passing earlier. I am a non-executive director of HM Revenue and Customs in my spare time, as it were, so I have some experience of this.

The CIOT thinks that it is much better to have the chief executive and, potentially, the chief operating officer—the senior members of the executive, if you like—of revenue Scotland as part of the governing body. In the terminology of schedule 1, they should be members.

We say that because we want to build the right sort of team for non-executives, if I can use that term, and executives, so that there is good regular interaction. It seems a little strange to set up a structure that has members—all of whom are non-executives—who govern but who, when they meet, do not routinely have the chief executive there. They can call her or him in to see them, and they would probably do that as a matter of routine, but it builds a better, more regular operating atmosphere if the top team consists of the members, the non-executives and the senior executives.

From my experience of being a board member at HMRC, that structure works. We are trying to take a regular team approach, with people who know, trust, and deal with one another regularly. That does not stop us challenging.

Does ICAS have a view on that one?

ICAS feels quite strongly that it would be much better to have a mixed team of executives and non-executives for the reasons that John Whiting has just discussed. It is slightly disjointed to have a completely non-executive board.

Revenue Scotland is going to be primarily operational and, if it is to have a proper handle on how operations are running, the chief executive needs to be on the board of revenue Scotland as a member of revenue Scotland. It would all pull together much better if the board had that mixture of executive and non-executive members. That is what most businesses do. A complete board of non-executives is often at one remove, which does not seem to make sense.

I also should mention that when we were asked about the issue in the consultation before the bill was drafted, the majority said that it should be a mixed board. What is in the bill is quite unusual, and, from subsequent conversations, it is my understanding that it has been decided to do it in this way because of the reporting provisions. However, the approach is perhaps slightly artificial.

Okay. We will move on to the issue of penalties, which has already been touched on.

Penalties are covered in sections 148 to 185. I do not propose to go through each section, but some stakeholders have made the point that the sections on penalties are a little bit light and overreliant on regulations.

As I read them, the sections on failure to submit a return, on failure to pay tax on time, on making an error and on underassessment by revenue Scotland have almost nothing by way of specifics. However, section 167 is explicit: it says that not complying with an investigation carries a penalty of £300, and submitting a document that has errors carries a penalty of £3,000. Some sections contain nothing, whereas others give exact sums. What is your view on what needs to change in the bill to comply with the principles that you think are important?

That is a very good analysis. We think that section 150 needs to set out what a failure is and what the penalty is. Given that there is provision elsewhere in the bill for penalty amounts to be increased in secondary legislation so as to keep up with inflation or whatever, it will not hamstring the system if such provisions are laid down in the bill—if the bill spells out the circumstances and the amounts. To me, it is as simple as that.

I completely agree with that. Sections 150 and 151 probably need the most expansion. The circumstances in which a penalty is payable should be on the face of the bill, and the amounts should be on the face of the bill, too. To me, the only things that should be in regulations are the procedure and the administrative side. Everything else should be in the bill. That is particularly the case for penalties for the most humdrum things: the failure to make a return and the failure to pay tax, which we come across most frequently.

Those are the regular ones.

Yes. Those are the regular ones—they are the penalties that really upset people when they get them. Usually, people do not appreciate that they should have done something, and they think that it is singularly unfair when they get a penalty.

I have a question about another aspect of penalties. Some of the issues are similar, and I will not press those points.

Section 163 is on “Under-assessment by Revenue Scotland”. From a brief reading of that section, it seems to me that, if revenue Scotland makes an error and underassesses, and if the taxpayer—or person P, as they are described in the bill—through carelessness does not notice that, they must pay a penalty because revenue Scotland has made a mistake. Further, it is up to revenue Scotland to decide whether that person has been careless. That struck me as giving revenue Scotland a fair bit of power. Effectively, it could rectify its own mistakes in that way. Do the witnesses have views on section 163?

Let us start with the fact that mistakes happen. In a sense, the starting point should be that, if an honest mistake has been made on either side, people should not suffer. What section 163 is trying to get at—you have picked up on this very well—is the situation in which it is blindingly obvious that the tax authority has made a mistake. If someone’s income is £1 million and the authority has put the decimal point in the wrong place and has instead assessed an income of £1,000, that is screamingly obviously wrong, as the person knows perfectly well, and frankly they should own up and say so. In such situations, we would accept that there is the possibility of a penalty if the person does not own up. However, even in such cases, there are issues around whether it is really that obvious to an ordinary taxpayer that things have gone wrong. You put it well. Section 163 seems to leave quite a lot of discretion to revenue Scotland.

My handwritten note says that that provision is very harsh, for two reasons.

In what will be quite unusual in a self-assessment system, revenue Scotland will issue an assessment in which it has made a mistake. That activity will involve a tiny fraction of revenue Scotland’s business. A really harsh penalty applies, yet—to return to your first point, Mr Brown—the bill is silent on all the other processes and procedures that might take place on a day-to-day basis. Who is doing what that might give rise to a penalty, which could then give rise to something equally harsh? Could it be harsher? Could it be less harsh? We do not know. On the question whether the penalty provisions in the bill should be really harsh, is that the tone that the Parliament wants to set? Do you want something much fairer? “Fairer” is another word that we used earlier. Do you want something that is quite lenient in certain circumstances, with something very penal put in place for persistent offences?

That is what we are trying to get at in relation to the shape and consistency of the bill and the penalty system. What is it that you are actually trying to penalise, by how much and with what caveats? In the view of ICAS, it is for Parliament to determine that, and that is why we wanted to have a discussion about what is in the primary legislation.

To paraphrase John Whiting, if an error is made in relation to someone with an income of £1 million and the mistake is blindingly obvious, you would have a lot less sympathy for somebody who did nothing than you would have for someone who was penalised if the error of margin was small and there was a perfectly feasible reason why the error was not picked up. You would find that a bit harsh.

It is not just a function of size. We are in a complex area, so you have to ask whether it is reasonable—to use a well-known word—to expect the average taxpayer to pick up the error.

Let us face it: most people who get a letter from HMRC tend to accept that HMRC has got it right, because tax is complex and people do not always understand it. You can project from there that if something comes from revenue Scotland that says, “We have assessed this. We’ve worked it out and the figure is so much,” the taxpayer will say, “Oh well, I suppose that must be about right.”

I come back to the point that if it is blindingly obvious that something is completely wrong, you can say that the taxpayer is at fault. However, whatever penalty there is should not penalise those who make a tiny error or errors that the taxpayer could not be expected to pick up. He or she is not the expert.

That concludes the committee’s questions. Would you like to make any points to the committee that have not come out from the questioning?

No. We have been given a good opportunity, so thank you very much for listening to us.

I echo what we said earlier: the bill team has done a good job. The CIOT put out a note earlier this week in which we awarded the bill eight out 10. That will very quickly get to nine out 10 with the discussions that we have suggested, although I do not suppose that we would ever give a bill 10 out of 10.

I am sure that the bill team will take eight out of 10 at this stage. There are still stage 2 amendments to come and the committee has yet to produce its report.

Thank you very much for your comprehensive answers, which the committee appreciates.

11:27 Meeting suspended.

11:35 On resuming—